Southern California Bankruptcy Law Blog

Bankruptcy Is The Wave Of The Future – Part I

Posted in Debt

As those of you who have followed my musings know, I maintain that the western world is headed toward financial ruin.  This post updates you with recent data supporting this position.

The good news is:  I also don’t see anything on the political horizon that has any hope of stopping it, so there’s no reason to put stock in anything the politicians say.  There:  isn’t it nice to be relieved of the disappointment that would come from buying into your favorite venal politician’s promises only to see those promises later evanesce into the hot air they were in the first place?

I.          The U.S.’s Financial Time Bomb

A.        The National Debt

Take a look at the U.S. Debt Clock to see what I am talking about.   When you do you’ll see lots of financial data in a very easily understood form.  Each datum’s source is provided − hold the cursor over the number and you’ll see the source in the box at the middle of the top of the screen.  For example, the national debt as of this writing is $15.77 trillion (Source:  The U.S. Treasury), and as you can see by looking at the U.S. Debt Clock it’s growing at a breathtaking rate.

This gargantuan number, which boggles the mind, is certainly a source of genuine concern − especially since China’s ability to continue subsidizing this debt ride is rapidly fading:

Faced with a sharply slowing economy, weak exports and faltering investment, China’s central bank unexpectedly announced late Thursday that it would cut interest rates by a quarter of a percentage point.  The action, by the People’s Bank of China, represents the strongest measure taken this year by the Chinese government to counteract an economic malaise that has infected Europe and the United States and now seems to be affecting China faster and more extensively than most policymakers or private economists had anticipated.

B.        The Federal Unfunded Liabilities

However, the $15.77 trillion national debt is chump change compared to the big time bomb looming on the horizon:  the U.S. unfunded liabilities.  You can see that figure at the center of the bottom of the U.S. Debt Clock, and it’s $119.2 trillion (Source:  The Federal Reserve).  That figure is seven and a half times larger than the entire national debt, and it’s growing at a tremendous rate.

What are those unfunded liabilities?  Primarily Social Security and Medicare, and these obligations are already starting to come due as the baby boom generation reaches retirement age.

Rick Perry was pilloried in the media for stating the inconvenient but obvious truth that Social Security is a Ponzi scheme.  How is it a Ponzi scheme?  It helps to know exactly what a Ponzi scheme is.

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.  The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.  The system is destined to collapse because the earnings, if any, are less than the payments to investors.

It is called a Ponzi scheme after its eponym, Charles Ponzi, who successfully used it in the 1920s to earn free federal housing.

So how is Social Security anything like a Ponzi scheme?

From its inception, Social Security has been billed as retirement insurance:  you pay into the fund during the years you work, and when you retire you draw on that money.  And given inflation of the currency, the amount you’ll draw out will be considerably more than you paid into the fund.  In other words, you’ll have a high rate of return.

Now, a high rate of return is possible if you invested in Microsoft in the 1980s, or Apple in the late 1990s and early 2000s.  The reason is obvious:  these companies were fabulously profitable.  How about the Social Security fund?  What are its earnings?  Oops . . . it has no earnings.  Its assets are comprised solely of the money being paid into the fund.  Since the outflow far outstrips in the inflow, the only way it can continue is by using the contributions of late comers to pay the folks who contributed years ago.  And indeed, right now the Social Security benefits that are being paid out are coming out of Social Security contributions that people are currently paying.

The same line of reasoning applies, mutatis mutandis, to Medicare.

C.        State And Local Debt

Well, you say, those federal politicians are just a bunch of peculating jerks!  At least we know that things are better on the state and local levels, don’t we?  Hmmm.  Let’s go back to the U.S. Debt Clock to see if that is true.

Total state debt is $1.1 trillion and local debt is $1.7 trillion.  That’s not so bad compared to the federal problem, is it?  States and localities don’t have the power to print money, and they don’t tax at nearly the same rates as the feds.  So yes, Virginia, there really is financial corruption at the state and local levels as well.

Well, we’ll just have to get to work earning a lot of money to pay off this debt, won’t we?  The jobs figures are just a bit bleak for that to work:

According to Tami Luhby in the June 1, 2012 CNN Money:

Businesses hired shockingly few workers in May, throwing into doubt the strength of the economic recovery.  Only 69,000 jobs were added last month, the weakest growth in a year.  The unemployment rate rose to 8.2%, the first uptick since last June.

I have to admit being a little surprised by that quote.  Who knew that we were in an economic recovery?

But, we can look for help, inspiration, and great economic ideas in Europe, can’t we?  See “Bankruptcy Is The Wave Of The Future – Part II” for my thoughts on the European financial time bomb.